When you’re trying to make ends meet and you don’t have a lot of options, loans are the easiest solution. However, when your credit score is low, or if your need for funds is immediate, going to the bank for loans might not be a feasible option. This is why most people turn to payday loans and title loans. Knowing the difference between the two loans will help you pick the right one for your needs.
Understanding title loans and payday loans.
Title loans are short term loans that take your car title as collateral. Payday loans are short term loans that need a postdated check. In the absence of a postdated check, this could entail giving the lender access to your bank account, usually where your paycheck is coursed through.
Both loans are notorious for their sky-high interest rates. There is a real risk of getting stuck in a debt cycle. However, title loans typically have relatively lower interest rates. They have a 300% or higher APR. Payday loans typically start at 400% APR.
When it comes to how much funding these loans can give you, there is a significant difference. With title loans, the lender will appraise the value of your vehicle and offer you a percentage of that value. This will usually be within the 25% to 50% range of your vehicle’s appraisal value. Payday loans are small cash loans whose amount depends on state laws. They usually fall in between $300 to $1,000.
While both loans are short term loans, which means they need to be repaid within a short period of time, repayment terms differ between title and payday loans. Title loans typically run for 30 days. Payday loans are due on your next payday.
The fees involved differ, too. Title loan fees vary by lender. This may include processing and insurance fees. Payday loan fees, on the other hand, usually run from $15 to $30 for every $100 you borrow. Before signing on the dotted line, make sure that you understand all the fees that are being tacked on to your loan.
To qualify for either loan type, you’ll need to submit requirements. Title loan applications typically require a government-issued ID, a lien-free car title, and your vehicle’s proof of insurance. Payday loans require a government-issued ID, your bank account details, and a regular source of income. Lenders rarely run a credit check for these types of loans.
What if you fail to pay for your title or payday loan? For title loans, you put your car title up for collateral. This would mean that the lender can repossess your car and sell it to pay off your loan. Payday loans do not require a collateral so lenders usually cannot repossess anything. This is why they have very aggressive collection methods including intimidation and threats of litigation.
So which of the two is better than the other? It really all depends on your needs and your capacity to pay. Whether you’ve decided to look for the best payday loans or the best title loans, the important thing is to pay off your debt on time to avoid getting stuck with either a burgeoning debt or the loss of your car and your peace of mind.This article originally appeared on payment1.com